Expert: Extension of production sharing agreement on Kazakh project of Kashagan unlikely

October 22 2012, 17:23

The extension of a production sharing agreement (PSA) on Kashagan Kazakh oil and gas project is unlikely, the Department Director of Due Diligence "2K Audit - Business Consulting / Morison International" Alexander Shtok stated.

"Today, Kazakhstan does not need agreements on production sharing. This mechanism was required when the country had no funds for development of the oil and gas industry. Currently, Kazakhstan is experiencing no difficulties in attracting investments, this is why cooperation with investors in the PSA format is not relevant. Moreover, Kazakhstan is trying to reconsider the PSA conditions for foreign investors in its own favor. Therefore it will be difficult to extend the terms of the PSA on Kashagan, the energy expert Shtok told Trend on Saturday.

The PSA on Kashagan was signed between the Kazakh government and investors in 1997 for 40 years. It guarantees the refund of outlays on field exploration through commercial oil production. The foreign investors are currently trying to extend the contract terms for another 20 years due to 'economic viability'.Such a scenario is extremely disadvantageous for Kazakhstan, since in this case by expiry of the agreement most of the oil reserves "Kashagan" will be developed.

According to the expert, apart from withdrawal of ConocoPhillips which has already been declared, other changes in the project shareholders are also unlikely.

"As for the other participants in the project, given the proximity of the project's launch - production is planned to be started as early as next year, it is unlikely that the shareholders will sell their stake in the Kashagan" Shtok stated.

The expert noted regarding the motives of ConocoPhillips, which announced intentions to sell its 8.4 percent share in the Kashagan, that they are associated with the company's strategy to reduce the debt burden.

"As part of this strategy, the company is selling assets around the world. Apparently, the Kazakh project is also amongst those assets,"Alexander Shtok added.

The expert believes that 'KazMunaiGas' Kazakh National Oil Company is most likely to buy the share of ConocoPhillips.

"The company has already shown its interest in the assets of ConocoPhillips in Kasagan.Given that the state has a priority right to purchase a share, it is unlikely that other shareholders will be able to enter the project. Moreover, in recent years, Kazakhstan is actively increasing its share in international projects and is unlikely to miss the opportunity to increase the share of the Kashagan" Shtok stated.

Since the beginning of Kashagan's development Kazakhstan has been increasing its share from 8 to 16.8 percent. In 2012, the country, represented by KazMunaiGas company, acquired a ten percent stake in the Karachaganak project, in which it has not previously participated.

Kashagan is one of the largest fields discovered in the past 40 years. According to analysts. Kashagan has the potential to unite the top five largest oil companies in the world. Kazakh geologists estimate geological oil reserves at 4.8 billion tons. According to the project operator, total oil reserves are 38 billion barrels (six billion tons), with a recoverable volume of about 10 billion barrels. Natural gas reserves are estimated at over one trillion cubic meters.

The companies, develop the project, are planning to begin commercial production on Kashagan in the first quarter of 2013.

At present the Kashagan project participants are Eni, Royal Dutch Shell, Exxon Mobil, Total and KazMunaiGas, which owns equal shares (16.81 per cent), as well as ConocoPhillips - 8.4 per cent and Japan's Inpex - 7.55 per cent.